Exploring the Channels and Impact of Debt on Economic Growth in South Asia

Riffat, Nisma and Munir, Kashif (2015): Exploring the Channels and Impact of Debt on Economic Growth in South Asia.

Abstract

This study investigates the existence of non-linear relationship between debt and economic growth in South Asia and explored the channels through which debt has its nonlinear impact on the growth of economy. Panel data on four South Asian countries over the period of 1991 to 2013 utilized and fixed effect model employed for estimation. The results suggest that there is nonlinear relationship between debt and economic growth in South Asian countries and the channels through which debt transmits impact into the economy are private investment, public investment and total factor productivity. The government should stimulate the revenue generation and reduce its huge current expenditures. Reducing debt accumulation alone will not rectify the problem unless the supplementary macroeconomic policies are made sound. By removing political constraints, macroeconomic imbalances, improving governance, reducing dependency on foreign aids and eliminating structural distortions, the problem of debt can be resisted.

• Item Type: MPRA Paper
• Language: English
• Keywords: Debt, Economic Growth, Investment, Total Factor Productivity, South Asia
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; H - Public Economics > H6 - National Budget, Deficit, and Debt; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Aizenman, J., Kletzer, K., & Pinto, B. (2007). Economic growth with constraints on tax revenues and public debt: implications for fiscal policy and cross-country differences. Working paper No. 12750. National Bureau of Economic Research.

Ali, R., & Mustafa, U. (2012). External debt accumulation and its impact on Economic Growth in Pakistan. The Pakistan Development Review, 51(4), 79-96.

Afxentiou, P. C. (1993). GNP growth and foreign indebtedness in middle-income developing countries. International Economic Journal, 7(3), 81-92.

Ayadi, F. S., & Ayadi, F. O. (2008). The impact of external debt on economic growth: A comparative study of Nigeria and South Africa. Journal of Sustainable Development in Africa, 10(3), 234-264.

Baldacci, E., & Kumar, M. (2010). Fiscal deficits, public debt, and sovereign bond yields (IMF Working Paper 10/184). International Monetary Fund. 1-28.

Bakar, N. A., & Hassan, S. (2008). Empirical evaluation on external debt of Malaysia. International Business & Economics Research Journal (IBER), 7(2), 95-108.

Boopen, S., Kesseven, P., & Ramesh, D. (2007). External debt and economic growth: A vector error correction approach. International Journal of Business Research, 211-233.

Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The real effects of debt. Working paper No. 352. BIS. (http://www.bis.org/publ/work352.htm)

Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2010). The future of public debt: prospects and implications.

Chenery, H. B., & Strout, A. M. (1966). Foreign assistance and economic development. The American Economic Review,56(4), 679-733.

Chowdhury, K. (1994). A structural analysis of external debt and economic growth: some evidence from selected countries in Asia and the Pacific. Applied Economics, 26(12), 1121-1131.

Cholifihani, M. (2008). A cointegration analysis of public debt service and GDP in Indonesia. Journal of Management and social sciences, 4(2), 68-81.

Clements, B. J., Bhattacharya, R., & Nguyen, T. Q. (2003). External debt, public investment, and growth in low-income countries. Working Paper No. 03/249. Retrieved from International Monetary Fund website: http://www.imf.org.

Cohen, D. (1993). Low Investment and Large LDC Debt in the 1980's. The American Economic Review,83(3), 437-449.

Cohen, D. (1997). Growth and external debt: A new perspective on the African and Latin American tragedies (Discussion Paper No. 1753). London: Centre for Economic Policy Research. 1-17.

Cunningham, R. T. (1993). The effects of debt burden on economic growth in heavily indebted developing nations. Journal of Economic Development, 18(1), 115-126.

Deshpande, A. (1997). The debt overhang and the disincentive to invest.Journal of Development Economics, 52(1), 169-187.

Doğan, İ., & Bilgili, F. (2014). The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach. Economic Modelling, 39, 213-220.

Doppelhofer, G., Miller, R. I., & Sala-i-Martin, X. (2000). Determinants of long-term growth: A Bayesian averaging of classical estimates (BACE). Working Paper No. 7750. National Bureau of Economic Research.

Easterly, W. R. (2001). Growth implosions and debt explosions: do growth slowdowns cause public debt crises?. Contributions in Macroeconomics, 1(1).1-24.

Elbadawi, I., Ndulu, B. J., & Ndung’u, N. (1997). Debt overhang and economic growth in sub-Saharan Africa. External finance for low-income countries, 49-76.

Fosu, A. K. (1999). The external debt burden and economic growth in the 1980s: evidence from sub-Saharan Africa. Canadian Journal of Development Studies/Revue canadienne d'études du développement, 20(2), 307-318.

Fosu, A. K. (2010). The external debt‐servicing constraint and public‐expenditure composition in sub‐saharan Africa. African Development Review,22(3), 378-393.

Gale, W. and P. Orszag.,(2003). The economic effects of long-term fiscal discipline,Urban-Brookings Tax Policy Center Discussion Paper No. 8 (Washington: Brookings Institution).

Geiger, L. T. (1990). Debt and economic development in Latin America. The Journal of Developing Areas,24(2), 181-194.

Hameed, A., Ashraf, H., & Chaudhary, M. A. (2008). External debt and its impact on economic and business growth in Pakistan. International Research Journal of Finance and Economics, 20, 132-140.

Iqbal, Z., & Zahid, G. M. (1998). Macroeconomic determinants of economic growth in Pakistan. The Pakistan Development Review,37(2), 125-148.

Klenow, P., & Rodriguez-Clare, A. (1997). The neoclassical revival in growth economics: Has it gone too far?. In NBER Macroeconomics Annual 1997, Volume 12 (pp. 73-114). MIT Press.73-103.

Krugman, P., (1988), Financing vs. forgiving a debt overhang: Some analytical issues. NBER Working Paper No. 2486, National Bureau of Economic Research.

Kumar, M., & Woo, J. (2010). Public debt and growth.(Working Paper No. 10/174). IMF working papers, 1-47.

Maghyereh, A. I., Omet, G. S., & Kalaji, F.(2003). External debt and economic growth in Jordan: the threshold effect. International Economics, 256 (3), 337-355.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2),407–437

Mathur, S. K. (2005). Economic growth & conditional convergence: Its speed for selected regions for 1961-2001. Indian Economic Review, 185-208.

Oleksandr, D. (2003). Nonlinear impact of external debt on economic growth: The case of post-Soviet countries (Doctoral dissertation, Economics Education and Research Consortium).

Poirson, H., Pattillo, C. A., & Ricci, L. A. (2004). What are the channels through which external debt affects growth?.(Working Paper No.04/15). Retrieved from International Monetary Fund website: http://www.imf.org.

Rockerbie, D. W. (1994). Did the debt crisis cause the investment crisis? Further evidence. Applied Economics, 26(7), 731-738.

Reinhart, C. M., Rogoff, K. S., & Savastano, M. A. (2003). Debt intolerance(No. w9908). National Bureau of Economic Research. 1-74..

Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a time of debt (Digest Summary). American Economic Review, 100(2), 573-578.

Sachs, J., (1989). The debt overhang of developing countries. Debt Stabilization and Development: Essay in Memory of Carlos Diaz Alejandro, ed. by Calvo, A.G., and others, (Basil Blackwell: Oxford), p. 80-102.

Schclarek, A. (2004). Debt and economic growth in developing and industrial countries. Lund University Department of Economics Working Paper, 2005, 34.

Siddiqui, R., & Malik, A. (2001). Debt and economic growth in South Asia. The Pakistan Development Review,40, 677-688.

Saint-Paul, G. (1992). Fiscal policy in an endogenous growth model. The Quarterly Journal of Economics,107, 1243-1259.

Sala-i-Martin, X., (1997). I Just Ran Two Million Regressions, American Economic Review Papers and Proceedings, pp. 178–183, May.

Sawada, Y. (1994). Are the heavily indebted countries solvent?: Tests of intertemporal borrowing constraints. Journal of Development Economics, 45(2), 325-337.

Todaro, M. P., & Smith, S. C. (2012). Economic Development. Addison – Wesley.

Were, M. (2001). The impact of external debt on economic growth and private investment in Kenya: An empirical assessment. Kenya Institute for Public Policy Research and Analysis.

Zouhaier, H., & Fatma, M. (2014). Debt and economic growth. International Journal of Economics and Financial Issues, 4(2), 440-448.